Impact

Access to Electricity

Access to electricity in Mozambique is low. By the end of 2014, only 25.2% of the households had access to the grid. Only a fraction of the population chooses electricity as their energy choice for lighting. Most are in urban areas. The vast majority (70%) of Mozambique’s population lives in rural areas, mostly working on subsistence farming. They face several constraints to transforming subsistence farming into market-oriented agriculture. Adoption rates for productivity enhancing agricultural inputs and technologies are very low. With only a small fraction of households in Mozambique relying on electricity as the main source of energy for lighting (only 1.3% of rural households) and most households tend to rely on less efficient and poorer quality alternatives such as kerosene, candles or wood for lighting.

It is estimated that 75% of the Mozambican population is off-grid. With a total country population currently estimated at about 28 million, this is equivalent to an immediately addressable market of 21 million off-grid people, or 4.2 million households (using a conservative estimate of five members per household).

On the other hand, the government has set very ambitious electrification targets, and plans to have the grid reach 50% of the population in 8 years. One of our interviewees has deemed this target unfeasible, given large investments needed and the current political crisis in the centre of the country. In addition, distances being very large between buildings in rural areas, the grid will most likely not reach a large number of people in the foreseeable future. DFID estimates that 40% of the population will be covered by 2030.

Lack of Energy Access Overlaps with Lack of Financial Access

Energy access and financial access initiatives are targeting the same people. The unbanked and off-grid households are to a large extent the same. At present Microfinance Institutions are the primary channel for increasing financial access. Over the last 5 years Pay As You Go solar companies have become the leaders at delivering electricity to rural households.

It has long been clear that energy access depends on financing. However, solar lending through MFIs has failed for a variety of reasons, but in particular because of an inability to embrace and manage equipment risk. As a result PAYGO solar companies have developed an in house financing capability, and are offering financing independently of the MFIs.

This situation has a limited lifespan. The level of finance needed to scale energy access is beyond the reach of solar distribution companies. They cannot find funding at the right cost or the right currency at the scale needed. It is also highly unlikely that they will be allowed to continue as unregulated financial institutions as their portfolios of consumer finance surpass multiple millions of financially unsophisticated rural household customers.

On the side of the MFIs, they are falling far behind the most significant development in low cost banking in decades – the emergence of digital finance which incorporates connectivity, data and mobile money. Digital finance is key to lower cost banking and to lending with less collateral either through remotely controlled equipment, or through credit scoring based on data. Lower cost banking can underpin further expansion, but this is out of reach in an environment of under investment and low skilled management.

PAYGO Solar is the Breakthrough Product for BOP Financial Services and for Energy Access

PAYGO companies are rapidly becoming the largest consumer financing companies in Africa with more than 1.4 MM customers added in less than 3 years. This success is extremely significant as it is based on the resolution of a decades old problem of how to lend to the BOP without additional collateral. The answer is by financing productive or cost reducing assets which can be prepaid, which can be immobilised remotely, and where payments are in small amounts via mobile money.

Consumer financing of solar is a breakthrough. The potential for growth is still vast. In Mozambique, more than 3 MM households [18 million people] are without access to the grid. However, it is clear that scaling of solar consumer financing is running up against 3 major hurdles of funding cost, regulation and currency matching. New PAYGO companies should be structured to overcome these barriers from the start, as well as continuing to relentlessly drive down transaction costs in order to offer lowest prices to the end customer.

PAYGO solar is just a single product, and already solar companies such as MKopa are looking at additional lending products, tied to the performance of the solar equipment already sold to a household. Taking this to its logical conclusion, PAYGO solar is the first of a family of future credit products to the BOP taking advantage of digital finance lending models. The MFIs that will continue to expand financial access need to fully embrace this new paradigm.